Power Lawyer Ken Ziffren on Netflix, TV and Future of Hollywood

"The question is when does the money run out?" the attorney said of Amazon and Netflix at a Hollywood Reporter event celebrating the industry's top business managers.

A savvy new class of venture capitalists, pension plans and high-net-worth individuals have replaced foreign investors and tax shelters as the primary financial backers of Hollywood movies, a top industry attorney said Wednesday at The Hollywood Reporter's third annual Business Managers Power Breakfast.

"Instead of being passive investors and basically taking their chances, the investor today is active and in many cases is also a production company itself or an investor in pictures rather than just letting the studio pick the pictures," said Kenneth Ziffren, founding partner at Ziffren Brittenham.

Ziffren's comments came during a keynote Q&A with THR executive editor Matthew Belloni at Cut restaurant in Beverly Hills as part of the event honoring the top business managers in Hollywood.

Ziffren said a quarter to a third of major studio movies in recent years have been financed through slate deals, where an investor puts up money for a group of films and makes a profit if enough of those movies do well. "I imagine that is going to continue until either their luck runs out," said Ziffren, "or they are no longer skillful."

While investors have for the most part made money, the major studios have taken a tough stance with actors, directors and other artists who make the movies. "The studios have not treated the major players as kindly as one might hope," said Ziffren. "There’s been a movement away from what we call first-dollar gross deals into gross pool deals."

What that means, he explained, is that five or 10 years ago an A-list star might share in the revenue from a movie along with the distributor even before all the costs of making and marketing a movie are recovered. No longer.

"The studios are fanatics at this point in trying to enforce that business structure on any picture they perceive to be risky," said Ziffren, adding: "In that respect, the artist isn't getting treated as well as he or she was 10 or 20 years ago."

He said artist representatives have responded by recalculating deals so that if the client is taking more risk, "in effect being subordinate to a return of capital to the studio, you should get more [money if the project] is successful. That's the way everything is moving."

Ziffren also questioned the economics of digital subscription channels like Netflix and Amazon that are investing heavily in original programming.

"The question is when does the money run out?" said Ziffren. "Netflix has shown a profit the last year or so but from a cash-flow point of view they are going deeper and deeper into the hole. The current game plan is to hold the $7.99 (per sub per month) price, which may or may not make a lot of sense, and try to do it purely on getting more subscriptions to cover your investment. I’m not sure of that play."

Ziffren also commented on the future of the television business, explaining that while the major broadcasters still sell shows one-by-one to advertisers for the most part, cable sells its entire slate and promises a certain number of rating points (the size of the audience).

"If they have a big hit like a Breaking Bad," said Ziffren, "they can now charge x hundred thousand dollars a spot. They are going to charge that on each and every spot on each and every program, so you lift all boats in that case and that's good for everyone."

Hollywood Reporter publisher and senior vp Lynne Segall opened the program by telling the restaurant full of business managers, "We know it's your client who usually gets al the attention," but THR believes it is "important to recognize the work you do because so many of you control so much of the money in this town."

The Power Business Managers event was sponsored by City National Bank, Delta Airlines and CAPS.